You always hear people / pundits / bloggers discuss ending the Fed. With inflation seeping into our economy and the Federal Reserve’s only answer to our economic problems is, essentially, counterfeiting. The idea of “ending the fed” has picked up steam.

Via PittsburghLive:

Supplying money, Hayek argued from 1976 until his death in 1992, is best left to private banks competing against each other for deposits. Entrusting government with monopoly control over the single most important good in a market economy — money — is a recipe for catastrophe.

Ask yourself (and answer honestly): If you possessed exclusive power to print dollars and spend them as you wish — and if you were allowed to imprison anyone who tried to compete with you in the money-supply business — might you be tempted from time to time to pay your bills not by working harder, but by simply rolling a few thousand more dollars off your printing press? When choosing between buying a new car or a luxury vacation to Tahiti, might you rescue yourself from the need to make this choice by printing enough money so that you can buy both?

You see the temptation.

Ben Bernanke (B.A. in economics in 1975 from Harvard University summa cum laude and Ph.D. in economics in 1979 from MIT), Chairman of The Federal Reserve has succemed to this tempation with his Quantitative Easing (QE2) program currently being implemented.

The idea of inflating currency is nothing new. Long term, looking at the performance of the Federal Reserve, they have steadily eroded the value of the U.S. dollar for a long, long time. Even worse, they have really not helped our economy:

A Fed apologist might respond that a 95 percent loss of value over 97 years means that the average annual rate of inflation was quite modest. True. But this low average masks great volatility. Selgin and his co-authors found also that “The price level had … become less rather than more predictable since the Fed’s establishment.” And, therefore, “as the Fed has gained greater control over long-run price level movements, those movements became increasingly difficult to forecast.”

Given prices’ important role in regulating consumer and investor actions, it’s not surprising that Selgin, Lastrapes and White fail to find any evidence that the Fed has moderated swings in economic output.

Perhaps most significantly, the evidence also shows that Fed intervention has lengthened economic downturns — such as the one we’re currently in — without reducing their severity (even if we exclude the Great Depression from the data!).

Finally, the evidence shows that the Fed has done nothing to reduce the frequency of bank failures.

The overall assessment by Selgin, Lastrapes and White is stark: “The Fed’s failure has been chronic.”

While “The Fed” has been, and will continue to be, an economic failure one interesting idea put forth to end the monopoly of the Federal Reserve s to revert to a “Free Banking” model.

A “Free Banking” system is a decentralized model, where individual banks issue their own currency. It was used in the United States before creation of the Federal Reserve in 1913. Another excellent example of this economic model was the free banking system of Britain that proved to be remarkably stable for over a century:

However, even if politics never enters into the decision-making of Fed officials, and even if those officials are guaranteed always to be the saintliest and most morally courageous human beings who ever breathed, having a monopoly money supplier is a very bad idea.

My George Mason University colleague Lawrence H. White and my former GMU colleague (now at the University of Georgia) George Selgin have devoted their prolific careers to studying the theory and history of central banking and its free-market alternatives.

White’s book “Free Banking in Britain” explains how free-market money-issuing in Scotland during the 18th and 19th centuries resulted in remarkably sound money. Selgin’s book “The Theory of Free Banking” explores in detail the reasons why competitive money issuers outperform a monopoly money issuer at supplying sound money and, hence, at avoiding problems sparked by too much (or too little) money creation.

This idea is not too far fetched. Today, if you go to the gas station and swipe your debit card at the pump, the card (currency) is backed by your assets (bank account). The difference would be that a bank issued currency it would be backed by a commodity (precious metals more than likely) and if there were several banks competing for business there would be a strong incentive to avoid inflation.